Industry Analysis Using Porter's 5 Forces Model
This model looks at five elements of the market, rivalry between competitors, alternate or substitute products, the bargaining power of suppliers and consumers, and the ease of entry into the market.
Rivalry amongst Competitors
The first factor is rivalry amongst the competitors within the industry. If the businesses operating in the market are highly competitive, the market is generally less attractive as prices can be forced down by aggressive marketing techniques, costs are increased, or both.
In this situation, opportunities are limited and are probably related to new technology or methods of production that reduce production costs. But the absence of rivalry or competition could signal an industry that is not profitable - if it was, you would expect that at least a few business men or women would be trying to take advantage of it!
The bottom line is that you are looking for an industry where there is a certain amount of rivalry from the competitors, but not so much that you are likely to be squeezed out before you have established your presence n the market.
Substitute products and services originate from outside of the industry or market that the business is operating in. If the substitute product can provide high quality or better value, their entry into the market can erode market share and profitability.
An example of this might be the market for sunscreen. Quite a few make-up manufacturers these days are adding sunscreens to foundations and moisturizers and competing against sunscreen manufacturers for sales. It is possible that opportunities may arise for your business if your product or service could satisfy the needs of consumers in another (related) market.
Bargaining Power of Suppliers
The bargaining power of suppliers determines who sets the price for their products. If there a relatively few suppliers and no alternative sources of supply, the supplier sets the price. If there are a lot of suppliers and alternate sources of the product, the buyer is more likely to be able to set the price.
To assess this factor you should investigate all of the potential suppliers for your business and find out how flexible they are on the price. If they are offering discounts to get your business and there are a number of different suppliers that you could source the same products or raw materials from, they are likely to have low bargaining power. If they are your only purchasing option (they have no competition), they are likely to have high bargaining power and you will be forced to pay the price that they set.
Bargaining Power of Consumers
This is the reverse of the bargaining power of suppliers, if you are in a market with relatively few competitors and very few substitutes for your products, you will be able to set your own prices. However, if you have a large number of competitors the consumer will set the price, and if you aren't prepare to meet it, they will buy elsewhere.
Potential Entry of New Competitors
In some industries it is difficult for new competitors to enter the market. The barriers could be government regulation, high start-up costs etc. A market with high entry barriers is likely to be very attractive to existing members, but less attractive to new entrants.
Another factor to consider while undertaking your industry analysis is where your industry is in terms of its life cycle. Industries or markets are generally classified as new or emerging, rapid growth, mature, or in decline. The 'life stage' of the market will largely determine the likelihood of opportunities existing within the market, and what form they will take.
For example, opportunities for a business operating in a market in decline are likely to involve re-inventing a product or service and the move into a related emerging market rather than being opportunities for growth in the existing market.
Next Steps in Your Industry Analysis
Once you have gathered all of the data about the 5 factors in Porter's model, it is time to put it together and get a feel for the industry.
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